Due diligence

I may be missing something here but for the life of me I can’t see “due diligence” mentioned neither in the question nor in the answer for December 2013 question 2 Willow

Have I misunderstood you?

Ok, I’ve found the question

Now, what exactly do you mean when you say “how do we adapt this type of qns”

Adapt it to what?

And which part of the question are you particularly concerned about?

The only time the word “report” is mentioned in the question is in part (iii) of the partner’s email …

“(iii) Describe the type of conclusion which would be issued for a due diligence report and compare this to an audit report.’” (other than just above the requirements where there is the line “and whether it would be similar to the opinion in an audit report.”)

So may I assume that you want me to tell you the type of assurance that the auditor will use in the due diligence report, as requested in part (iii)?

A due diligence report is involved where an audit firm is engaged to report direct to a third party about matters investigated at another party and, dependent upon the terms of the engagement, it could take the shape of an “agreed upon procedures” assignment

In that case, no assurance at all will be given

But if we are to consider the assignment as a direct reporting assignment to include some level of assurance then we can identify differences between audit reports and due diligence reports

Leaping out at me as a difference between an audit report and a due diligence report is the type of assurance given. In an audit report the auditor is giving positive assurance (if applicable) that the financial statements reported on show a true and fair view

In a due diligence report, because a full audit is not carried out, only limited, negative assurance can be given in the form of “Nothing has come to our attention to suggest ….”

For a full audit leading to a positive assurance audit report the auditor will apply, probably, a complete range of evidence gathering techniques whereas for a due diligence report, dependent upon the agreed terms of the engagement, the auditor will likely restrict the work carried out to enquiry and analytical procedures

Is that what you wanted?

Oh, ok

Well, I’m not going to comment on 23 pieces of further information that are suggested in the printed solution and I’m finding it difficult to know what you want with reference to the focus points

However, your question asks how to adapt to such a question

The only thing / approach that I can suggest is that you mentally transport yourself into a meeting with the personnel at Baltimore and establish what it is that they hope to achieve by this potential acquisition

Now, if this were you looking to take over another company, what would YOU like to know about the potential victim?

Obviously (I believe it’s obvious, anyway) I think that you would want to know about the owners and the management of Mizzen and particularly the skills and ambitions of the personnel that we’re hoping to use to write our website

But then, having started the ball rolling in your mind, you need to generate more questions about matters that you could do with knowing more about before investing a substantial amount of cash into the acquisition

Patents, premises, personnel,

contracts, leases, value of assets and completeness of disclosure of obligations,

accounting policies (depreciation, development expenditure, leasing, borrowing, revenue recognition ….), progress invoicing,

corporate governance, ethics (how do you find that out???) of the management, sophistication, efficiency and effectiveness of internal controls

What else would you want to know? Put it in your list

You asked for “how to adapt”

In my view, it comes down to an ability to put yourself mentally in the position where you ask yourself “What would I do?” or “What would I expect?” or “How would I do this?”

It’s the ability to make the question / situation come to life

That’s how I would adapt my approach

Hope that helps

Review engagement work tends to be restricted to analytical procedures and enquiry

if you can remember the other three ways of collecting evidence, then there’s your answer!

(Can you remember the other three ways?)

Inspection, observation, (re)calculation

You’re welcome

That’s good – let’s hope it stays with you for a few more days 🙂